Single-Serve Coffee Competition Is Brewing Again

www.keurig.com
Things are starting to heat up in the single-serve coffee market. Keurig Green Mountain (GMCR) continues to dominate this growing niche, but a big gamble on a new platform and hungrier competition are setting the stage for a more competitive future.

Keurig Green Mountain reports on Wednesday afternoon. Analysts see strong year-over-year top-line growth. They forecast that revenue will climb 11 percent during its fiscal fourth quarter to $1.16 billion. Wall Street pros are not as keen on the bottom line, targeting a 13 percent decline in earnings per share.

Investors aren't panicking. Shares of Keurig Green Mountain hit all-time highs this month ahead of the quarterly report. There are plenty of factors weighing on profitability. Costs related to the rollout of Keurig 2.0, fluctuating coffee prices, and a higher effective tax rate this time around will keep earnings in check.

Any negative sentiment is being offset by accelerating portion pack sales as Keurig Green Mountain continues to ink new partnerships and expand its reach. Naysayers thought that Keurig would be in a bind when its original K-Cup patents expired two years ago, but the company has been able to sway many private labels to stick with it. BJ's Wholesale Club, Harris Teeter, Target's Archer Farms and Nestle's (NSRGF) Coffee-mate are just some of the companies that have recently decided to partner with Keurig instead of trying to cut the java giant out.

However, with Keurig 2.0 off to a rough start and competition looming, the future may be more challenging than the present.

Keurig Two-Point-Uh-Oh

Keurig Green Mountain thought it would have a hit this holiday season with the recent rollout of a new single-serve platform that provides more efficient brews and even makes entire pots of coffee. The market's initial reaction to Keurig 2.0 has been chilly. The average rating for the flagship K550 system is 2.5 out of 5 stars on Amazon, with more than half of the 467 reviewers giving it the lowest single-star rating.

Keurig 2.0 uses label-scanning technology that may optimize the brewing process for each individual K-Cup portion pack, but it also rejects non-Keurig refills. It even rejects older K-Cups. Investors were initially excited about the new brewer because it came with new patent protection, and the label-scanning feature blocks third-party portion packs that work perfectly fine on older Keurig brewers.

Keurig Green Mountain took a gamble, and it doesn't seem to be paying off if holiday shoppers follow the lead of the initial coffee-sipping reviewers.

Bring on the Competition

Keurig's 2.0 bet comes at a time when the competition is starting to percolate. I recently kicked the tires of Remington's iCoffee Opus, a new $140 single-serve brewer that accepts all K-Cups, including the unlicensed third-party portion packs.

The Opus uses patented SteamBrew technology that spins the cup as the needle steams the contents of the portion pack. The iCoffee claim is that this will make a smoother and less acidic brew, though it remains to be seen if that's relevant or discernible to mainstream coffee addicts. The main feature in a world in which Keurig Green Mountain is pushing the restrictive Keurig 2.0 platform is that it makes java out of any portion pack. It also accepts a reusable filter for folks who like to grind their own portion packs.

It's not the only one out there. Everyone from Hamilton Beach to Bunn has coffeemakers that accept all K-Cups and renegade knockoffs, and the same can be said for Keurig-licensed brewers by Mr. Coffee and Cuisinart that haven't embraced the 2.0 platform. The holiday season is going to get very competitive as we see if Keurig Green Mountain's bet will pay off, making any guidance that the company may provide on Wednesday afternoon critical in assessing the prospects for its Keurig 2.0 system.